Re-Redeveloping Downtown: Behavioral Bargaining in Real Estate Markets

1. Fifth Bi-National Regional Science Workshop Tel Aviv, April 29-30, 2007 Re-Redeveloping Downtown:Behavioral Bargaining in Real Estate Markets Danny Ben-Shahar Technion – Israel Institute of Technology Yuming Fu National University of Singapore Sau Kim Lum National University of Singapore Tsur Somerville University of British Columbia

2. MOTIVATION Explore (both theoretically and empirically) the sale process of collectively owned residential real estate for the purpose of redevelopment

3. OBJECTIVE • Test for determinants of successful collective sales • Analyze the effect of policies instated to promote sale of buildings for redevelopment • Look for empirical support for theories in behavioral economics

4. SUMMARY OF THE RESULTS • The greater the number of collective owners, the lower is the probability of a sale and the longer is the sale process • The greater the difference between owners, the lower is the probability of a sale and the longer is the sale process • The greater the redevelopment potential, the higher is the probability of a sale and the shorter is the sale process

5. Bargaining among owners on the expected price and its division Agent believes the expected price is reasonable Agent believes the expected price is too high No Sale Bargaining between the owners and the buyer Bid price > expected price Bid price = expected price Bid price< expected price Sale Bargaining among owners on the division of the negative surplus Disagreement among owners Agreement among owners Disagreement among owners No Sale No Sale Sale THE GAME We do not observe Bargaining among owners on the division of the positive surplus Agreement among owners Sale

6. RELEVANT LITERATURE - I Land Assembly w/ landowner heterogeneity Eckart (1985) and Strange (1995) assume players are rational and predict: • Higher land price (per sqf) for small parcels (due to lower opportunity cost of failure) • Land prices for assembly rise w/ number of lots to assemble

7. RELEVANT LITERATURE - II Behavioral Economics (Self-Serving Assessment of Fairness) – Babcock and Loewenstein (1997) • People evaluate information in ways that are beneficial to one’s own outcome • More likely in situations where there is ambiguity Experimental support from the “ultimatum” game: • Hoffman et al. (1994), Knez and Camerer (1995), and Kagel et al. (1996) Empirical support from union contracts: • Babcock, Wang, and Loewenstein (1996) - strikes more likely the larger the spread of comparable wages • Thompson and Loewenstein (1992) - difference between management and labour’s assessment of “fair” settlements correlated with strike length • Babcock and Olson (1992) - each side to a labour dispute picks a “fair” reference focal point that is favorable to itself

8. THE MODEL • N landowners • Share of each owner is αi ( ) • Owners total reservation price is B • Buyer’s offer is P • The issue is the division of P–B: • No problem when P=B • Problem arises with positive surpluses P>B and negative surpluses P<B

9. SELF-SERVING BIAS OF “FAIR” DIVISION Suppose α1=33% and α2=67% then: If P<B β1=33% and β2=50% If P>B β1=50% and β2=67% where βi is the owner’s subjective share in the positive and negative surpluses, (P-B) That is, We have under-demand of negative surplus and over- demand of positive surplus

10. SUBJECTIVE DIVISION RULE

11. PREDICTIONS • Result 1: The sum of the values requested by the landowners increases (and thus the likelihood of a transaction diminishes) with the number of relatively “small” landowners, ceteris paribus. • Result 2: The sum of the values requested by the landowners increases (and thus the likelihood of a transaction diminishes) with the variation in the ownership share, ceteris paribus.

12. DESCRIPTIVE STATISTICS A total of 285 residential projects:

13. REGRESSION RESULTS

14. The End